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Morocco Holds Key Rate Despite Signs of Economic Slowdown

(Bloomberg) -- Morocco’s central bank kept its benchmark interest rate unchanged at a record low 2.25 percent, even as it warned of an economic slowdown stretching into next year.

The decision Tuesday came amid a dramatic falloff in credit growth and inflation, both potential catalysts for a rate cut to stimulate investment.

Government data for the second quarter “indicate an economic activity level well below expectations,” Bank Al Maghreb said in a statement announcing the quarterly decision. It projected the economy would expand 3.3 percent this year compared to 4.1 percent in 2017, slow further to 3.1 percent in 2019, then rebound to 3.6 percent in 2020.

The government’s 2019 budget is based on a forecast of 3.2 percent growth.

The growth slowdown complicates efforts by North Africa’s largest energy importer to juggle sometimes conflicting priorities. While falling food costs and a decline in oil prices are bringing relief, the government is trying to boost output and investments at a time when it’s cutting costs and leery of antagonizing citizens fed up with limited job opportunities and the high cost of living.

“There may be a need for more money in the economy and some inflation in the engine,” said Olivier Bru, head of treasury at BNP Paribas’s Moroccan affiliate Banque Marocaine pour le Commerce et l’Industrie. “Morocco is the kind of country that needs to sustain an upward trend for investment loans because that’s the engine of tomorrow’s growth.”

In its statement, the central bank noted annual inflation fell to 1.1 percent in October from 2.5 percent in June, mainly on lower food prices. Inflation is expected to average 2 percent by the end of the year, then come in at 1 percent in 2019 and 1.2 percent in 2020, it said.

The recent decline in oil costs may bring inflation -- which jumped to a five-year high in April -- toward zero next quarter, according to Bloomberg Economics.

What Our Economists Say...

“In the first half of 2018 when inflation hit 2.7 percent, there was more talk of raising the rate and the central bank said it was not tightening. Now it looks like a rate cut may come into play next year, although our core scenario is for the central bank to remain on hold.”

--Mark Bohlund, Africa economist, Bloomberg Economics

For more, see his MOROCCO INSIGHT

The bank also reported on Morocco’s external accounts, with exports up 9.7 percent on the year in the first 11 months of 2018, driven mainly by the automotive and phosphate industries. Tourism revenue was largely stable, while worker remittances fell by 1.7 percent.

Assuming an inflow of grants from a 2011 Gulf Arab aid package -- expected at 4.8 billion dirhams ($501.6 million) in 2018 and 2 billion dirhams in 2019 -- the current-account deficit will rise to 4.4 percent of gross domestic product by the end of this year, from 3.6 percent in 2017, the central bank said.

Weighing on growth is the slowdown in lending, which in October clocked its lowest annual increase since January 2016. Investment and mortgages have fueled the deceleration, with housing loans growing slowest since 2002.

The central bank won’t need to worry as much about the dirham coming under pressure after the government received a new lifeline from the International Monetary Fund. On Monday, it approved a new precautionary and liquidity arrangement of almost $3 billion as a buffer against external shocks.